Julie Krieger Featured in Wall Street Journal on Wealth Transfer

When wealth is tied up in a family business, it can be hard to pass those assets to the next generation without Uncle Sam taking a big bite.

That was the dilemma Julie Krieger, a partner and wealth adviser at New York City-based Evercore Wealth Management, faced with her client.

The client was in his late 60s and had a net worth of $70 million – most of which was concentrated in his privately held retail business. He hoped to eventually pass on the business to his only child, an adult daughter, who was involved in running the company. To that end, she had already received gifts of more than $2 million in company stock from her father. But how could he pass along more of the company to his daughter without triggering a massive tax bill?

Ms. Krieger, whose firm has $3.6 billion under management and typically works with clients with at least $5 million in assets, saw an opportunity to take advantage of the $8 million in unused estate and gift-tax exemptions available to the client and his wife. After all, those unified exemption amounts are scheduled to change at year’s end.

“They’re likely to be much lower in 2013,” says Ms. Krieger, “so we recommended they use up their limits now.”

The plan was to transfer shares to the daughter through an irrevocable trust, giving as many as they could without triggering taxes. The first question was which shares to choose, because the company was made up of a series of S Corporations and limited liability companies.

Working with a team that included the company’s chief financial officer, accountant and attorney, Ms. Krieger realized that it made the most sense to gift shares of an entity with strong growth potential to the irrevocable trust. The reason: Any future appreciation inside the trust would be free from estate taxes, so the bigger the asset’s growth potential the bigger the potential tax savings.

“We chose an S Corp that was already one of the top performing entities, located in a suburb with a rapidly growing population,” says Ms. Krieger.

She recommended that the client put a majority of shares of that S Corp–which was valued at around $16 million–into the trust, and make his daughter both the trustee and the beneficiary.

The client liked the idea from a tax standpoint, but there was a problem: Giving the trust a majority of shares and making the daughter trustee would give her total control over the S Corp, and he wasn’t ready to cede control of any part of his company.

Ms. Krieger had a solution: make the gifted shares nonvoting shares. S Corps only allow one class of stock, but the owner can designate specific shares to be nonvoting. Even though the majority of the shares would be in the trust for the daughter, the client would retain a small portion of voting shares to retain control over the entity.

Another benefit: Ms. Krieger estimates the shares will receive a 30% valuation discount for tax purposes because of their nonvoting classification. What’s more, because the company’s shares are privately held, their valuation may also be discounted for what the Internal Revenue Service calls “lack of marketability.”

All told, the client will be able to put $13 million worth of shares into the trust, but Ms. Krieger estimates they will be valued at only $8 million for tax purposes. That means the client will use up but not exceed his and his wife’s remaining estate and gift-tax exemption.

The plan is in motion and the client intends to move the assets into the trust before the end of the year. If tax rates change as scheduled next year, the client will face an estate tax rate of 55%. “If he passes away in 2013 after we move the assets into the trust,” says Ms. Krieger, “I estimate we’ll have saved him over $7 million in taxes.”

While volatility in the stock market can be discomforting, it can provide opportunities for long-term investors, said Martha Pomerantz at the annual Minneapolis Star Tribune investors roundtable. She noted that Evercore Wealth Management expects continued low inflation and interest rates. To view the firm’s latest thinking, please see the current issue of Independent Thinking.